Being successful at your investments is not a numbers game. It is a mind game. Successful investing is a play of some basic things which can be practised and followed by anyone. Today, we bring these basic principles together in the form of 7 commandments of investments for our readers.

• 1. Asset Allocation is the key:

Studies have shown that asset allocation is the primary factor, the biggest determinant of how much returns your portfolio will generate. This is very simple to understand. For eg., if your equity portfolio is just, say 10% of your entire portfolio, inclusive of real estate, gold, bank deposits, insurance policies, etc., then it would not matter how well your equity portfolio performs. Having the right asset allocation is most important in the wealth creation journey over the long-term. And it begins by your understanding and having a proper look over your entire portfolio, not just that part which you can track daily.

• 2. Investing is simple but not easy:

Many investors often believe that to succeed and make money in the market, one has to be an expert, have inside information, try to best time the markets, predict what is going to happen tomorrow and so on. However, the most important fact to realise is that investing is very simple and based on some principles which do not need an expert to follow. Things like - being patient, starting early, saving regularly, following a right asset allocation, not making too many investment mistakes and staying invested for long or doing nothing are perhaps the most important factors for the success of your investment. Although these things are simple and easy to follow, in reality, they are not easy to follow at all.

• 3. Investing without goals is meaningless:

Often we invest without any goal or target. Most of our investment is also lying around without any purpose or target or any objective. On the other side, most of our traditional investments are kept aside for say retirement or marriage of daughter without ever planning or knowing the exact requirement for fulfilling those goals. Thus, most of us do not have goals and even if the goals are there in mind, they are rarely properly planned. Proper planning requires very little time or even expertise, however, it can prove to be very critical. Proper goal planning will ensure that your goals are never compromised and you fulfil them. Goal setting can be event specific and even general like wealth creation of say XX amount at YY date in future. Without goals, there is no direction and investments will be at the mercy of many different and less important things.

• 4. Investor behaviour is the reason for underperformance:

Many studies have shown the markets to deliver good returns but the investors are found to be under-performers by a great margin. The average market returns are always higher than the average investor returns. The gap between the two returns is attributed largely to investor behaviour. Investor behaviour, as per many studies, is found to be illogical and often based on emotion which is not good/wise for long-term investing decisions. An average investor typically buys when the markets are high, over-reacts to situations or short-term market events and sells when the markets are low. We are instantly reminded of the famous cycle of fear, greed and hope which follows every time.

• 5. A good financial advisor can contribution great value:

There is no doubt that a good advisor/ expert can deliver great value to your portfolio. An advisor's primary role is to manage investor's behaviour or emotions apart from everything else he does. An advisor will make sure that you do not sell or buy at the wrong time. This in itself has the potential to add great value to your portfolio. Further, an advisor is likely to suggest you the right, optimum asset allocation as per your needs, something most of us do not follow. Apart from these things, an advisor normally helps us to make our financial plan, save towards our goals, push us to save more, take proper insurance coverage, help ongoing management of the portfolio, operational support, and so on.

• 6. Equity is the best asset class in the long term:

From the past equity market experience, this is evident. Long term investment in equities will likely exceed returns from every other asset class. BSE Sensex returns since inception (1st April 2979) till today is nearly 15.8%. Just staying invested in the index would have multiplied your wealth by over 370 times in the past 40 years. However, there have been also many times that in one year the returns have been in negative 50-60%. The instances of negative returns steadily decrease as the duration increases and perhaps over say 10-15 years, the negative return instances (for investment at any point of time) is very rare to see.

• 7. Mutual funds are the ideal vehicle for investment:

One does expect you to perform like Warren Buffet who had the skills and the patience to identify and hold on to good businesses to become wealthy. Most of us do not have adequate time, resources, skills and information to go and find the winners. That is a full-time task of investment professionals. The next best thing for every one of us is to make use of the fund management team of mutual funds. Mutual funds, in essence, are vehicles for investment and the underlying can be any asset class or products. Mutual funds offer investors the widest choice of investment and many other advantages over traditional investments, including tax benefits and operational convenience and much greater transparency.

The last budget presented by the government was widely welcomed by everyone. There were many key measures taken for the benefit of taxpayers. Now that the new financial year: 2019-2020, has dawned upon us, let us look at these changes already in effect.

1. Key Tax Changes:

The important thing here to note is that the tax slabs have not changed and the earlier tax slabs will continue. However, there does exist a few benefits and concessions to the taxpayers.

Tax rebate: The tax rebate available earlier for individuals earning annual income up to Rs 3.5 lakh has been now increased. The total income threshold is now Rs.5 lakh which means an increase in the tax rebate from Rs 2,500 to Rs 12,500. However, this rebate is available only to persons having net taxable income up to Rs.5 lakhs and for others with higher net income, this benefit will not be applicable.

Standard Deduction: The Standard Deduction available to salaried employees has been increased from Rs.40,00 to Rs.50,000. With this change, there is an additional tax saving of up to Rs 3,120 for individual taxpayers earning between Rs.10 to 50 lakhs.

2. TDS Limits:

The Tax Deducted at Source (TDS) limits has been changed significantly for the current financial year. The important thing to note is that while the applicable tax does not change on the income, TDS limit extension does benefit small investors as it will reduce the hassles of claiming a refund where the annual income is below exemption limit.

Interest Income: The threshold for deduction of tax at source on interest earned from banks and post office deposits has been increased from Rs 10,000 to Rs 40,000.

Rental Income: The Rent Limit for deduction of tax has been increased to 2,40,000 from 1,80,000 in the previous year.

3. Real Estate:

Some pretty important changes were made related to real estate taxation norms. This will surely benefit a lot of owners and the real estate markets as well.

Notional Rent: From this year, you will not be required to pay income tax on notional rent from your 'second' house lying vacant. Effectively, 'self-occupied' definition is extended to two houses if the other is not let out. Earlier if an individual had more than one house property, he was required to treat anyone as 'self-occupied' and was required to calculate notional rent and pay tax on the other properties accordingly, irrespective of whether the property was on rent or not.

Capital Gains: This year onwards, a taxpayer can claim exemption from capital gains on the sale of house property if the sale proceeds are invested to purchase/construct up to 'two' house properties. This benefit was available to only one property earlier subject to conditions. This benefit shall only be applicable if (a) the long-term capital gains shall not exceed Rs 2 crore and (b) the benefit is claimed only once in the taxpayer’s lifetime.

New GST Rates: The GST is an important component for the housing sector and effective this year, the rates have been further rationalised. For on-going under-construction projects, there is now an option either to charge the GST at 12% with an input tax credit (ITC) or at the new rate of 5% without ITC. In the case of affordable housing, these rates will be 8% with ITC or 1% without ITC.

Popular tax saving avenues:

An important element of income tax rules and also tax planning process for investors is the tax saving provisions available to them. For the new financial year FY 2019-2020, let us have a look at the various options and limits available to us, most of which is a continuation of the previous year.

Apart from the above popular tax saving avenues, there are also some important deductions available for rebate /eligible expenditure made which may not be applicable to all but is still widely used.  

Note: The income tax details are indicative in nature. Please consult your financial advisor /tax expert for more details.

It is a fact that the equity markets have not been performing well in recent times. This is not at all surprising as history shows us that the markets are and will be volatile in the short-term. However, there are likely many new investors who have entered equity markets only in the recent past, especially through the mutual fund SIP route. It may not come as a surprise that some of these investors may be feeling a bit worried about the short term performance of their equity funds. In this piece, we will talk about some basic investing principles which would help calm the nerves a bit.

Should you look at short-term SIP returns and worry?

Since you have invested in an equity mutual fund scheme, we assume that your investment horizon would have been long term or related to any long term financial goal. In personal finance parlance, long term is considered a minimum of five years.

It is important to understand that nothing is wrong with your choice of investment for the time horizon you have chosen. You just need to understand that the markets will go up and down, especially in the short term. That is their basic characteristic. It is only in the long run that you will see an increasingly consistent rising graph or upward movement. On the positive side, you may even be happy that the markets have not rallied, as you are now buying stocks at relatively lower price consistently through SIP. That is, in fact, one of the primary advantages of investing through SIP.

Almost every expert knows that the equity returns tends to follow the nominal GDP growth rates (i.e, the real GDP growth rate + inflation figures) in the long-term. With the Indian economy expected to grow at 7% + (real GDP) over the next few years, markets will eventually catch up and deliver positive returns. Hence, investors should not worry about lower or even negative returns in the short-term and continue their SIPs confidently.

Should I look to change my schemes?

Again, the performance of any fund or a fund manager can only be made over time. One year or less is too short a time to comment on the quality of fund management. If one particular scheme is not doing well today, shifting to another well-performing scheme will not guarantee you high returns. All returns and performance are historical in nature and hence will not matter much. Also, shifting between schemes with similar investment objective and investing in the same category/nature of stocks will not improve your portfolio much as the underlying universe of stocks will likely be similar.

What is more important in any portfolio composition is whether there is proper asset allocation and diversification. You should check whether your asset allocation is right for your investment horizon or risk appetite. Next, you could also see if your equity investment is appropriately spread into large, mid or small-cap investments – again as your profile and need. Frankly, we would strongly advise you to consult a proper financial advisor /distributor to construct your portfolio appropriately.

How long should you continue your SIP investments?

The best way to look at a SIP is by mapping or allocating your SIP to some life event or financial goal. For eg., higher education for your child, retirement plans for self, purchase of a second home, and so on. Even if these goals are over 10, 20, 30 years afar, an SIP route will deliver the best likely returns from amongst all asset classes. Given the importance of your financial goal, you should not stop any SIP linked to it as it will directly compromise the success of your goal.

If you do not wish to link your SIP to any goal, we would suggest that the life of any SIP should be at least 5-7 years for it to deliver good returns. Having said so, an SIP can be closed at any point of time – whenever you may need money. A new SIP today must be at least 5 years long.

Should I invest more money in equity funds?

This brings us back to basic questions – what is your investment objective, time horizon, risk appetite for this investment? And also most importantly, what is your present asset allocation? Once, these facts are known, you will have your answer. Broadly speaking you should invest if, your asset allocation in equity is low or your investment objective is to create wealth, the time horizon is long term and your risk appetite is aggressive.

Independent of above things, one is always advised to invest in markets which are not performing well or in other words, the valuations are relatively low. If you have an SIP you should consider increasing the SIP amount periodically – say half-yearly or yearly. Step-up SIPs are now available in the market which automatically increases your SIP amount at a set frequency. This is a more logical thing to do and also ensures that your savings grow along with your income over the years. Perhaps one should approach a good financial advisor to guide you on your fresh investments.

As smart investors, we also need to understand that fall in markets do give an opportunity for new investors to enter the market. Unfortunately, in India experience has shown that most investors enter markets when the returns are 30%-40% over the past year hoping that they too will make easy money.

In the end, we would suggest that a new investor should seek the help of a good financial advisor /planner to guide him/her in his investing journey. If you are investing directly on your own and are worried today, we would strongly suggest that you gain more knowledge and understanding on how the markets and investments work and even seek guidance, if felt required.

One single person cannot be an expert at many things. One may be good at quite a few things but can one call himself as an expert on multiple subject matters? Probably not. Thus, a normal person would need different experts and consultants at different points in time. These experts can be in the form of say, your teachers, gym /yoga instructors, doctors, lawyers, accountants and even your spiritual guide or guru. One such important expert in your life would be your financial advisor but the importance of whom most of us do not fully appreciate.

The financial advisor may come in many different names or designations, irrespective of which their primary concern would be your financial well-being and ensuring that you are financially successful. Thus, choosing and having the right financial advisor is very important as it will have an impact on one thing you value most – your money.

Who is a Financial Advisor:

A financial advisor is one who would be interested in your overall financial well-being. A good advisor would be one who is competent and committed to ensuring financial success for you. The financial advisor should be one who could provide you with advice and access to different financial products as you may need. He should be the one able to not only create and manage portfolios of different financial products but also handle you as a person. The financial advisor would play the critical role of managing your expectations, your emotions, help you build the right habits, attitude and appetite for investments and also help you become more aware of your finances.

Why should he/she be right?

Since we are strictly dealing with your financial well-being here, there is very little scope for compromise. At stake is a huge impact on your wealth – the difference between what a good / decent advisor and the right advisor can make for you. Small decisions, choices of products, timely actions, managing emotions, expectations, etc, everything potentially can end up making a huge difference to your finances especially when we project that over many years or long term.

Why do we need an advisor?

To start with, financial advisory is a huge field in itself. It encompasses different aspects of finance, including financial planning, investment & portfolio management, insurance or risk management, tax planning, retirement planning, cash-flow management, and loan /debt management. I am not sure how many of us would be competent /knowledgeable in each of this aspect. Bringing together all these pieces together is just one part of financial advisor. The real impact a financial advisor would bring would be in effectively managing your emotions and expectations and saying no to you where needed. There is a risk that financial decisions taken by us get affected by > emotions, biases, prejudice, knowledge, understanding, delays and so on. The advisor would help us by bringing professionalism, logic, emotional control, discipline in decision making and bringing all aspects of financial management under one umbrella of strategy or approach.

Who is probably not the right advisor?

Traditional Agents/ Brokers /Accountants:

The role and expertise of a proper financial advisor is an established field in itself. One should not expect a comprehensive assessment and solution to your financial needs from persons handling only specific aspects of your life. This is true for you, unless he/she is also a financial advisor, accountant, banking executive. insurance agent and stock broker. There are many traditional agents in the market who are really not looking at solving your problems or needs but are only interested in pushing the most profitable products to you. One should be more careful of their bank executive selling new ideas, the stock broker frequently churning portfolio and giving tips, and the insurance agent in neighbourhood selling only traditional plans.

Personal relationships:

Having a relationship with an incompetent advisor is not recommended even if you have other reasons for maintaining that relationship. At the end of the day, there is always a chance that you are not satisfied with the advisory part and then that may even ruin the other relationship you are having with that person. It would be advisable to differentiate a personal relationship and a professional relationship and deal / hire the right advisor to manage your finances.

Who is the right advisor for you?

• Competence: Your financial advisor has to be competent. Being competent can be seen as a combination of essentially two things -

• Knowledge: Knowledge is all about knowing everything you expect the advisor to know, including knowledge about assets, products, taxation, etc and also keeping oneself updated on markets and economy.

• Skills: Skills can be seen in two parts – (a) financial advisory skills (c) soft skills. The advisor should be smart enough to your prepare financial plans, do portfolio restructuring, decide upon the right products suitable for you, prepare reports /insights, evaluate products, make decisions based on right inputs, execute plans /transactions and so on. Soft skills would be largely about effective communication and relationship management with you.

• Infrastructure: Knowledge and skills have to be supported by adequate infrastructure. The existing infrastructure should be adequate enough for you to be serviced. The advisor has to be empowered by suitable product basket, technology platform, services, manpower and physical infrastructure. All this will access to the required products, ensure ease of operations, service quality and technology comfort for you too.

• Commitment: The financial advisor should be committed to you. We can interpret this commitment and see it as a combination of the following -

  • Acceptance: the advisor accepts you as a valuable client and is dedicated to serving you. The impact of this acceptance & dedication would reflect on the entire relationship you have with the advisor. Absence of this aspect of relationship would not help you no matter how competent your advisor is.

  • Understanding: another aspect of commitment would be reflected in the extent to which the advisor takes the effort to understand you as a person and your finances. Without a proper understanding of your profile, background, financial status, needs and expectations, it would be difficult for him to give the right advice to you.

  • Intent: The last part of commitment is the intent of the advisor. There are many people in the industry, say bank executives or insurance agents promoting traditional plans only, whose true intentions and/or product biases to be understood. The advisor has to act in your best interests only and not be biased for any particular products or services. A good advisor will not be transaction or product oriented but will talk more in terms of problems or needs and solutions for them.